I Asked ChatGPT To Explain How To Use a Credit Card To Build Credit From Scratch
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Written by
Harrison Pierce
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Edited by
Amen Oyiboke-Osifo
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Reviewed by
Jasmin Baron
Building your credit is a daunting task. You aren’t born with a credit history, so you need to take concrete steps when you’re young to establish a solid credit profile. Good credit is essential when you want to buy a house, rent an apartment or even apply for a job.
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I asked ChatGPT for a step-by-step plan on how to use credit cards to build credit from scratch, and this is what it provided. Note that you shouldn’t rely solely on advice from AI tools, but as a credit expert, I can distinguish between good and bad advice to create this comprehensive guide.
Step 1: Understand How Credit Works
Before you do anything, you should read up on how credit works.
Your FICO score is determined by several factors:
- Payment history (35%) shows if you pay your bills on time. If you have a history of late payments, you may appear to be a risky borrower, and your credit score will likely decrease.
- Amounts owed (30%) includes your credit utilization ratio, which shows how much of your available credit you’re using. Ideally, you’ll want to keep your credit utilization ratio under 30%.
- Length of credit history (15%) indicates how long your credit accounts have been established. In general, the longer your credit history, the better for your score.
- New credit (10%) is the number of new credit accounts you’ve opened recently. If you open several credit cards at once, this may indicate that you are overextended.
- Credit mix (10%) refers to the types of credit you have, like a credit card, mortgage or other loan.
Your goal should be to consistently make payments on time and maintain a low credit utilization ratio, because these two factors represent 65% of your FICO credit score.
Step 2: Apply for a Starter Credit Card
If you don’t have a credit history, you likely don’t have a credit card. This can make it challenging to be approved for a general rewards card. Instead, you can look for secured credit cards. These require a security deposit that serves as your credit limit. Once you establish a positive credit history, you can typically graduate to an unsecured version of the card and get your security deposit back.
If you are a student, you can also consider a student credit card. These can be secured or unsecured, but are only for those enrolled in higher education. These cards are typically easier to get approved for because lenders know most college students don’t have a lengthy credit history.
Make sure to get a card that reports to all three major credit bureaus: Equifax, Experian and TransUnion. The best way to build credit from scratch is to have a credit report at each of these bureaus. Once you select the card that best aligns with your financial goals, you can apply.
When you submit an application, you’ll receive a hard credit inquiry. This can temporarily lower your credit score, but don’t worry — as long as you pay your card in full each month and keep your overall debts low, your score should bounce back.
Step 3: Use Your Card Responsibly
The most crucial part of building your credit from scratch is using your new credit card responsibly. You should treat it like a debit card — don’t spend more money than you have. You’ll want to pay off your balance on time and in full each month to avoid paying credit card interest. It can be helpful to set up auto-pay so you don’t forget to make your payment on time.
As you use your card, keep an eye on your credit. Many credit cards offer free monitoring tools that allow you to view your updated credit score directly in the app. If not, you can make accounts with each of the three credit bureaus to monitor your credit reports, or use a tracking tool like Credit Karma. Building credit takes time, but you should start to see improvement around six months into your credit-building journey.
Step 4: Upgrade to a Better Card
Your first credit card may not offer many perks. Once you establish a solid credit score, you can upgrade to a better credit card. Perhaps you’re looking for a lucrative cash-back card or a travel rewards card that requires good credit.
No matter which new card you choose, you should try to keep your first credit card account open. The length of your credit history helps your credit score, so even if you don’t use it very much, it’s worthwhile to have in your wallet. Plus, the available credit on that first card helps your overall credit utilization ratio.
Bottom Line
By following these four steps, you’ll be on your way to establishing a positive credit history from scratch. The most important thing to remember is to pay your bill on time and not spend more than you can afford to pay. If you ask ChatGPT to explain how something works, always verify its accuracy before following the advice it provides.
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